From 1 July 2019, you can only claim deductions for payments you make to your workers (employees or contractors) where you have complied with the pay as you go (PAYG) withholding and reporting obligations for that payment.

If the PAYG withholding rules require you to withhold an amount from a payment you make to a worker, you must:

·         withhold the amount from the payment before you pay it

·         report the amount to the ATO

Any payments you make where you haven't withheld or reported the PAYG tax are called non-compliant payments. You won't be able to claim a deduction if you don't withhold any PAYG tax or report the PAYG tax to the ATO. If you make a mistake and withhold or report an incorrect amount, you will not lose your deduction.

Payments that must comply

You can only claim a deduction for the following payments if you comply with the PAYG withholding rules:

·         of salary, wages, commissions, bonuses or allowances to an employee

·         of directors' fees

·         to a religious practitioner

·         under a labour hire arrangement

·         for a supply of services (except from supplies of goods and real property) where the contractor has not provided you with their ABN

  Non-cash benefits

A non-cash benefit is something you provide instead of paying cash, for example goods or services. In this case, you still need to report the PAYG tax to us in order for this to be classified as a compliant payment and allow you to claim a deduction.

Correcting a mistake

If you withhold an incorrect amount by mistake, you won't lose your deduction. To minimise any penalties you can correct your mistake by lodging a voluntary disclosure in the approved form.

If the correct amount is withheld but a mistake is made when reporting it, the deduction is not lossed. However, these mistakes need be corrected as soon as possible.

Failure to withhold or report

If PAYG tax should have been withheld from a payment but didn't, you will lose your deduction for that payment, unless you voluntarily inform the ATO before they have commenced an audit or review into your compliance activity. You can do this by making a voluntary disclosure in the approved form to the ATO.

If you withheld PAYG tax from a payment but didn't report the amount to the ATO at all, you will lose your deduction for the payment unless you report the amount to before an audit or review has commenced.

Mistaking an employee for a contractor

There may be a situation where you honestly believe your employee is acting as a contractor, so you don't withhold PAYG tax from their payments as they have provided you with their ABN. In this instance, although you have made a mistake and not withheld PAYG tax from payments you made to your employee, you won't lose your deduction for these payments because you complied with the withholding obligations for a contractor.

You can correct your mistake by lodging a voluntary disclosure to the ATO

We recommend you use the ATO's Employee/contractor decision tool to check if your worker is an employee or contractor.

Penalties

If you don't comply with your PAYG withholding and reporting obligations for a payment, deductibility is denied and you may face penalties that apply for failure to withhold and report amounts under the PAYG withholding system.

  Information sourced from the ATO